NCPA - National Center for Policy Analysis

New Tax Bill Addresses Biases Against Saving and Investing

June 25, 2003

The Jobs and Growth Tax Relief Reconciliation Act of 2003 contains several major provisions that will encourage hiring and capital formation; however, these reforms are only temporary and must be extended to have maximum impact upon the economy, says Stephen J. Entin.

While President Bush wanted to completely eliminate the double taxation of both dividends and capital gains, the House ultimately decided to treat capital gains and dividends equally with a rate of 15 percent on each (the Senate's plan would have continued to tax capital gains twice, thereby favoring dividends).

In the former tax code, there were two different tax biases which needed to be addressed:

  • The basic bias of the income tax against saving (and in favor of consumption) results from taxing both income that is saved and the returns on that income; all income is taxed when earned, but while there are almost no further federal taxes on consumption, money earned from investing in a stock or bond is taxed again.
  • The other anti-saving bias in the tax system is the taxation of dividends at both the corporate and shareholder levels; profits are taxed as corporate earnings and if they are passed on to shareholders as dividends, they are taxed as personal earnings when the stock is sold.

The goal of a good tax system is to eliminate the tax biases against saving and investment. The current Act is a good start and may ultimately lead to a system that puts income saved on a par with income used for consumption, says Entin.

Source: Stephen J. Entin, "The Final Tax Compromise: A Good Outcome Despite the Limited Budget and Political Constraints," Congressional Advisory No. 154, June 6, 2003, Institute for Research on the Economics of Taxation.

 

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